Wealthy families tap dynasty, generation‑skipping trusts

High-net-worth families are placing assets into irrevocable dynasty and generation‑skipping trusts while the federal gift and estate tax exemption sits at $15 million and remains indexed for inflation, advisers report. Planners say the trusts remove assets from a grantor’s taxable estate for gift and generation‑skipping transfer tax purposes so heirs can use trust assets without those funds being counted toward future transfer taxes.

Dawn Jinsky, a certified financial planner and certified public accountant who leads estate and business transition planning at Plante Moran Wealth Management in Southfield, Michigan, urged clients to act while the exemption remains high. She said some clients want to lock in the exemption before potential changes to federal tax law reduce the amount available.

Generation‑skipping trusts are commonly written to benefit grandchildren, while dynasty trusts are designed to preserve wealth across multiple generations. Planners say the structures can protect assets from claims in divorce or lawsuits and from an heir’s imprudent spending. Past federal proposals have included estate tax rates near 40 percent, and assets transferred into these trusts today could escape such future transfer taxes if laws change.

Advisers caution the trusts carry tradeoffs. They require ongoing administration, may trigger income tax reporting and create legal and accounting costs that can outweigh benefits for families far below the exemption level. Mistakes in drafting or rigid trust terms can produce unintended tax liabilities and governance problems that persist for decades.

State tax rules add uncertainty. Seventeen states and the District of Columbia currently impose an estate or inheritance tax, and trustees several decades out may confront a different state tax map than the grantor anticipated. Changes in local banks or trust companies can also affect who serves as trustee when later generations take over.

To address those risks, planners recommend built‑in flexibility in trust documents. Typical provisions include authority for a trust protector, decanting clauses that let a trustee shift assets into a new trust, and express power for trustees to modify terms to respond to future state laws or practical needs.

Family dynamics are another factor. Lack of clear explanation about the trust’s purpose and rules can create resentment among heirs. Advisers commonly recommend frank intergenerational discussions, written letters of wishes, or other communications so beneficiaries understand the grantor’s intentions and the trust’s governance.

Most planners refer clients to tax attorneys or estate counsel to draft these long‑lived instruments. Financial advisers still participate by modeling tax scenarios, estimating setup and maintenance costs, and recommending draft provisions that allow future adjustment. For families not near the exemption threshold, advisers say the complexity and expense often do not justify creating a dynasty or generation‑skipping trust.